Take the Time to Properly Sell Your Business – and Win the Rewards

Michigan SBDC - 2014 LogoYou’ve spent years planning, building and running your business, and now it’s time to reap your rewards one ultimate time and sell it.

Ideally, it’s a day you’ve methodically considered and worked toward for years as you’ve operated your company, says Eric Seifert, a business growth specialist with the Michigan Small Business Development Center.

He says 10 years out is not too soon to begin prepping for a sale. That gives you ample time to build the business’s value and fine-tune its operations as necessary — such as by building the customer base or cutting expenses — to make it as attractive as possible to potential buyers, he says.

“The first thing is to be prepared,” says Seifert, who’s also administrator for the Muskegon Angels small business investment program. “It takes a lot more work to properly exit a business than it does to buy one, so the longer you prepare, the better.”

Part of the preparation involves creating a contingency plan if you have to sell the business sooner than expected, such as because of an illness. “At least you’ll be much further ahead if you have to start from scratch,” Seifert says.

Seifert offers a number of other tips and points to consider when it comes to selling a business.

Setting a price
Owners have a natural inclination to overvalue their business’s worth, Seifert says. “They might hear the sales price of other, similar businesses and think theirs is more valuable, when it’s actually not,” he says.

Some standard formulas and calculators — many of which are available online — can help business owners devise a reasonable valuation, although those methods often fail to account for factors and subtleties unique to individual businesses and might offer only rough estimates at best, Seifert says. Professional valuation services, which typically charge between $600 and $5,000 depending on the size of the business being sold, can offer a more precise figure, as can business brokers who have likely handled numerous similar transactions, he says.

Ultimately, however, valuating a business is more art than science. “It boils down to what a willing and qualified buyer will pay,” Seifert says.

And it’s not always about fetching the highest price. Sometimes the cultural fit — such as a buyer’s vow to retain existing employees —is the deciding factor, Seifert says.

Finding buyers
Because business sales are not publicly recorded as real estate transactions are, information about sales of comparable companies is often scarce. Business brokers usually have that type of information, but most sales are conducted without their assistance, Seifert says.

One source of sales information is BizBuySell.com, which bills itself as the largest business for sale marketplace and maintains listings of businesses that are on the market nationwide.

Social or professional networks are also potential sources of buyers. “Cocktail talk can lead to a deal getting struck,” Seifert says.

And, of course, business brokers have their own networks for bringing more parties to the table while weeding out unqualified or not serious buyers up front, he says.

Working with specialists
Most business owners have at least a small cadre of other professionals, such as an accountant and an attorney, whose advice they rely on to operate their company. Typically, however, the professionals are generalists in their field and have little or no experience in selling businesses.

Buyers, on the other hand, might have experts on their side, putting the seller at a disadvantage. “I sometimes advise my clients that just for this transaction — the most important one of their life — they might have to utilize a different attorney or accountant who specializes in selling businesses,” Seifert says. “You wouldn’t go to a general practitioner for brain surgery, and you want the best advice you can get in this case.”

It’s also a good idea to make a personal financial or wealth adviser part of the team. Assuming, for example, that the seller plans to live off the sales proceeds in retirement, the financial adviser can help determine if the net funds will provide the income he or she needs, Seifert says.

But perhaps the most important professional a seller can employ is a business broker. Sellers, understandably, have emotional attachments to their businesses, and brokers can objectively point out flaws that could potentially affect the sales price, Seifert says. Also, when negotiations get tough, they have the experience to react to buyers’ tactics.

In addition, brokers are adept at compiling the significant amount of material involved with selling a business, Seifert says. “Sellers can forgo the fee that goes with hiring a broker, but the whole process is a lot of work,” he says. “Brokers can save you time and create more competition for the business.”

Some brokers receive an upfront fee, but their primary compensation is based on the sales price. For example, they typically receive 10 percent of the first $1 million, 8 percent of the second million and a sliding percentage on additional amounts, although it’s often possible to negotiate the fees a percentage point or two lower, Seifert says.

The sales process
When buyers are sufficiently interested and negotiations are ongoing, sellers should have them sign a nondisclosure agreement that will protect the confidentiality of information about the business if the deal is eventually not completed, Seifert says. Buyers will also sign a letter of intent that outlines how they plan to purchase the business. In the meantime, the business is taken off the market for 60 to 90 days so the buyer can complete due diligence, Seifert says.

It’s also a time for sellers to look into buyers’ backgrounds, particularly if the buyer is asking the seller to finance at least part of the sale. In those cases, a bank or other financier is likely to have first dibs on the company’s assets if the new owner fails. “So you need to look at the worst case and ask yourself how much it will hurt if you don’t receive the balance due from the buyer,” Seifert says.

Gathering information
The Small Business Development Center offers periodic “Buying and Selling a Business” workshops throughout the state. The half-day sessions, which cost $25 to attend, are geared toward those who are looking to purchase or sell a business, as well as accountants, attorneys, business brokers, financial planners, CEOs and CFOs.

To find a workshop near you, go to sbdcmichigan.org and click on “Register for a Workshop.”